Input credit need not be reversed when finished goods are destroyed and duty remission is granted.

Where finished goods are destroyed by fire or another unavoidable accident and remission of duty is granted, the input credit taken on materials used in their manufacture is not required to be reversed. The remission provisions under Rule 49 of the Central Excise Rules, 1944 and Rule 21 of the Central Excise Rules, 2002 allow waiver where goods are lost or destroyed by natural causes or unavoidable accident, but they do not impose any express condition of credit reversal. Such loss is not treated as clearance of exempted or nil-rate goods, and the inputs are regarded as having been used for the intended manufacture. Accordingly, non-reversal of Modvat credit is upheld.

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Issues: Whether modvat credit on inputs used in the manufacture of final products destroyed by fire or other unavoidable accident, where remission of duty on the finished goods is granted, is required to be reversed.

Analysis: The relevant remission provisions under Rule 49 of the Central Excise Rules, 1944 and Rule 21 of the Central Excise Rules, 2002 permit remission where goods are lost or destroyed by natural causes or unavoidable accident, or become unfit for consumption or marketing, but they do not impose any express condition requiring reversal of credit taken on inputs used in those goods. The loss of the finished goods with remission granted is not treated as equivalent to clearance of exempted goods or goods chargeable to nil rate of duty. On that basis, the inputs are regarded as having been put to intended use in manufacture, and the credit does not stand to be reversed.

Conclusion: Modvat credit on the inputs is not required to be reversed when the finished goods are destroyed and duty remission is granted; the view favouring non-reversal is upheld.

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